We all witness the currency price of a country advancing and retreating everyday against another country’s currency, but what are the implications for those who don’t trade in the forex market? The forex market is the most liquid market, and the currency rates affect travel, trade and the economy. Let us take a look at the nature of currency exchange and its effect on people and economics.

Before exploring the topic further, we must set a model or constant. For demonstration purposes, let’s study the relationship between the euro and the U.S. dollar and their effect on the American and European economies if the euro trades relatively higher than the dollar.  The assumption we will be making is that US$1 will purchase 0.8 Euros.

Businesses And Equities:

The effect of this rate is a little more complex because these businesses are mostly multinationals, and they often conduct transactions in a number of different currencies and import their raw material from various sources. That established, U.S. based companies generating most of their revenue in the U.S. but source their raw materials from Europe would most likely see their margins take a hit on increased costs.

American companies paying their staff in Euros experience the same dilemma. These decrease margins would probably have an adverse effect on overall corporate profits and likewise, on equity valuations in the domestic market. Stock prices may experience a drop due to these lower earnings and forecasts for future profit potential.

On the other hand, U.S. companies that have a bulky overseas presence and draw in hefty revenue in Euros, but pay their employees in U.S. dollars could actually fare well.

European companies that generate most of their revenue in Euros and source their raw material and employees from the U.S. would most likely see and marginal expansion because of the decrease in cost and currency. This could potentially lead to higher business profits and equity valuations in some overseas stock markets.

Travelers:

U.S. citizens will be disinclined to travel if $1 buys 0.8 Euros because everything from food to souvenirs will be more than 48% expensive. On the flip side, European travelers would be much more apt to travel across the ocean to visit America for business and pleasure both. American business and government will prosper because of the extra tourist activity, even if its just for one season.

Foreign Investment:

Under these conditions, it is probable that European individuals and corporations would expand their investment in the United States.  They would also be better off making acquisitions of American-based companies and real estate, which has, in fact, happened several times in the past. Equally, American corporations would be less prone to acquire a European company or real estate in the situation of U.S. $1 for 0.80 Euros.

Protect Yourself From Sudden Currency Moves:

Before hopping on a plane, check the most recent currency rates so you can plan the choice of location accordingly. There are many ways of doing so: look in the business section of your local newspaper, check with a travel agency or search the internet. A great tip for travelers is to make international purchases using a credit card because credit card companies negotiate the best rates and the most favorable conversions because they work on such a huge volume of transactions.

For small and large business owners working in the U.S. and sourcing their raw material from Europe, a good strategy would be to stock certain type of supplies if the price of the euro starts to climb rapidly against the dollar. On the contrary, if the euro starts falling against the dollar, it is sensible to keep inventory at a minimum in the hope that the euro will decline enough for the company to save on its purchased goods.

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